Cosco Pacific, the container leasing arm of Chinese shipping giant Cosco priced a debut bond on Friday via lead managers ABN AMRO, Citigroup and Goldman Sachs. Unusually, the deal was not rated and as such most observers believe the company had to paid a premium over the levels it could have otherwise achieved.
With a 10-year tenor, the $300 million transaction was priced at 99.367% on a coupon of 5.875% and yield of 5.96% to give a spread of 185bp over Treasuries, or 140bp over Libor. Fees totaled 60bp.
Books for the transaction closed just above the $1.5 billion mark, encouraging the leads to tighten indicative pricing from a range of 200bp to 210bp over to 185bp plus or minus 2bp. Even at this level, analysts still thought the deal had plenty of value and indeed, it went on to tighten a further 15bp to 17bp at the onset of secondary market trading.
Observers say the company's implied rating would probably fall around the mid triple B level, but finding a comparable credit in the Hong Kong/China universe is difficult. Citic Pacific is cited as the nearest match. But Citic has a more diversified credit profile, spanning Hong Kong as well as China, plus it is rated one notch lower at BBB-/Baa3, with a stable outlook from both agencies.
It has a 7.625% June 2011 bond outstanding, which was bid on Friday 114.77% to yield 5.26%, giving a spread of 118bp over Treasuries, or 128bp over Libor. Bankers estimate the maturity differential between Citic and Cosco to be worth about 20bp, meaning that Cosco priced about 8bp through Citic on a like for like basis.
In a research report published on Friday, UBS said that, "Given the absence of credit ratings, parental linkages and lack of track-record with credit investors, we believe the spread level of the Citic 11s will form a resistance level for Cosco's spread, although we consider Cosco to be a better credit vs Citic Pacific."
The only other liquid Chinese corporate benchmark outstanding is CNOOC, which has a Baa1 rating with positive outlook from Moody's. Both CNOOC and Cosco Pacific can tap into a huge Chinese investor base. But CNOOC also benefits from a dollar-denominated balance sheet and a long-standing track-record with investors, which has pushed it towards the trading levels of single-A rated Hong Kong proxies such as the MTR Corp.
Finally, there are the outlyers in the Hong Kong credit universe such as Baa2/BBB rated PCCW and A-/A3 rated Hutchison Whampoa. Against both of these, Cosco appears expensive. PCCW's July 2013 bond, for example, is quoted at 153bp over Libor and Hutch's February 2013 bond at 166bp over.
A total of 118 accounts participated in Cosco's deal, with a geographical split of 80% Asia, 20% Europe. The Asian component broke down to 41% Hong Kong, 32% Singapore, 25% China and 2% others. By account type, asset managers took 37%, banks 27%, corporates 12%, private banks 10%, insurance 5% and others 9%.
Cosco Pacific's rationale for the deal was to address its lopsided capital structure. On the one hand, the company currently has a very low gearing level, with net debt to equity standing at 12.5%. However, it places too much reliance on short-term debt. Therefore, while the average age of its assets is 10 to 20 years, the average maturity of its debt is three-years.
Proceeds from the bond deal are being used to re-pay about $140 million in commercial paper and to finance acquisitions. Earlier this year, the company announced its intention to purchase 49% of its parent's logistic assets this November for $142 million..
Over the medium-term, analysts expect net debt to equity to rise to about 40% to 50%. Many believe the group will make further port acquisitions and strengthen its existing facilities. Cosco Pacific and Singapore's PSA Corp, for instance, are said likely to spend about $750 million in capex to construct a second berth in Singapore within the next few years.
Cosco Pacific has three main business lines. It is one of the world's six largest container leasing companies, with parent Cosco accounting for about 70% of its leasing revenues. Through 50% owned Cosco-HIT, the company also has a number of container terminal operations in Yantian, Shekou and Qingdao among others. It further owns a 20% stake in Hong Kong-based LCH Bank.